Reading 9 – The Firm and Market Structures

question

Perfect Competition's AD

answer

Is perfectly elastic because all firms are price takers.

-An increase in price will make the firm loose all demand since products are identical

-Supply and Demand determine the prices

question

Monopolistic Competition's AD

answer

Is downward sloping because all products are differentiated.

- An increase in price might decrease demand since there are good substitutes.

question

Oligopoly

answer

Interdependent firms

-Which make all firms consider changing their prices based on other's decisions
-Different models to assess these decisions.

question

Monopoly AD's

answer

Down ward facing demand and has the power to choose the price to sell the product.

-Will choose to maximize profits

question

Nature of competition

answer

Oligopoly and monopolistic competition differentiate their products with the help of marketing and features.

-Monopoly uses advertising

question

MR = MC

answer

Profit maximization for ALL structures.

-For price takers, MR is the same as price because all additional units are to be sold at the same market price.

question

Profit Maximization

answer

Profit maximization is maxed at MC = MR or

When total revenue exceeds total cost by the maximum amount.

question

No economic profits in perfect competition

answer

Firms will enter the market with identical cost curves.

In equilibrium = P = MR = D = MC = ATC

ATC is at its minimum

question

Long - run equilibrium

answer

Price = ATC

-In monopolistic competition P > MC, there is a markup.

-ATC is not at a minimum, suggesting inneficiency

question

Oligopoly Models

answer

- Kinked Demand
- Cournot Duopoly
-Nash Equilibrium
-Stackelberg

question

Kinked Demand Assumptions

answer

An increase in price will not be followed by other firms, but a decrease will.

-More elastic demand above a specific price. When price rises above x, demand will be more sensitive to changes.

-Below is less elastic because firms will follow price decreases.

question

Cournot Model

answer

Duopoly, two firms, will set price based on the other firm's previous decisions.

-Output will be shared and price is less than a single monopoly potential.

question

Stackelberg Model

answer

One Leader firm that sets the price and others base their decisions on that.

-As more firms are added to the model, equilibrium price drops.

question

Nash Equilibrium

answer

Collusion is an important concept here. Choosing the best possible outcome for both.

question

Less cheating in collusion

answer

- Few firms
- Similar cost structures
-Purchases are relatively small and frequent
-Retaliation is more harsh

question

Dominant firm

answer

A dominant firm sets the price, other firms are price takers.

question

Price range in Oligopoly

answer

Somewhere between perfect collusion (Monopoly Price) and perfect competition that generate zero profits in the LR

question

MR formula

answer

MR = P(1-1/elasticity)

question

Price Discrimination

answer

-Must have at least two identified groups with different elasticities.
-No reselling

question

Deadweight loss and Monopoly

answer

DWL is reduced when there is price discrimination.

-Charge the maximum customers are willing to pay.
-Less total output and higher prices

-Higher DWL compared to Perfect Competition

question

Natural Monopoly Regulations

answer

1) Average Cost Pricing = GOOD

-Normal profit because Price = ATC
- ATC = Demand curve

2) Marginal Cost Pricing =

MC = Demand curve
-Increases output and reduces price
-Subsidies

question

Supply curve within market structures

answer

- There is no supply curve in any except perfect competition.

-Quantity supplied depends not only on a firm's MC but on demand and MR

question

Supplu function Perfect Competition

answer

MC Curve above AVC curve.

question

HHI M&A

answer

Sum of the market shares before and after the merger. Maintaining same amount of firms constant.

-Sensitive to mergers with two large market share firms

question

n-firm concentration ratio

answer

- Simple to calculate

- But does not measure market power or elasticity of demand

-Barriers to entry are not considered

1 of 25

question

Perfect Competition's AD

answer

Is perfectly elastic because all firms are price takers.

-An increase in price will make the firm loose all demand since products are identical

-Supply and Demand determine the prices

question

Monopolistic Competition's AD

answer

Is downward sloping because all products are differentiated.

- An increase in price might decrease demand since there are good substitutes.

question

Oligopoly

answer

Interdependent firms

-Which make all firms consider changing their prices based on other's decisions
-Different models to assess these decisions.

question

Monopoly AD's

answer

Down ward facing demand and has the power to choose the price to sell the product.

-Will choose to maximize profits

question

Nature of competition

answer

Oligopoly and monopolistic competition differentiate their products with the help of marketing and features.

-Monopoly uses advertising

question

MR = MC

answer

Profit maximization for ALL structures.

-For price takers, MR is the same as price because all additional units are to be sold at the same market price.

question

Profit Maximization

answer

Profit maximization is maxed at MC = MR or

When total revenue exceeds total cost by the maximum amount.

question

No economic profits in perfect competition

answer

Firms will enter the market with identical cost curves.

In equilibrium = P = MR = D = MC = ATC

ATC is at its minimum

question

Long - run equilibrium

answer

Price = ATC

-In monopolistic competition P > MC, there is a markup.

-ATC is not at a minimum, suggesting inneficiency

question

Oligopoly Models

answer

- Kinked Demand
- Cournot Duopoly
-Nash Equilibrium
-Stackelberg

question

Kinked Demand Assumptions

answer

question

Cournot Model

answer

Duopoly, two firms, will set price based on the other firm's previous decisions.

-Output will be shared and price is less than a single monopoly potential.

question

Stackelberg Model

answer

One Leader firm that sets the price and others base their decisions on that.

-As more firms are added to the model, equilibrium price drops.

question

Nash Equilibrium

answer

Collusion is an important concept here. Choosing the best possible outcome for both.

question

Less cheating in collusion

answer

- Few firms
- Similar cost structures
-Purchases are relatively small and frequent
-Retaliation is more harsh

question

Dominant firm

answer

A dominant firm sets the price, other firms are price takers.

question

Price range in Oligopoly

answer

Somewhere between perfect collusion (Monopoly Price) and perfect competition that generate zero profits in the LR

question

MR formula

answer

MR = P(1-1/elasticity)

question

Price Discrimination

answer

-Must have at least two identified groups with different elasticities.
-No reselling

question

Deadweight loss and Monopoly

answer

DWL is reduced when there is price discrimination.

-Charge the maximum customers are willing to pay.
-Less total output and higher prices

-Higher DWL compared to Perfect Competition

question

Natural Monopoly Regulations

answer

1) Average Cost Pricing = GOOD

-Normal profit because Price = ATC
- ATC = Demand curve

2) Marginal Cost Pricing =

MC = Demand curve
-Increases output and reduces price
-Subsidies

question

Supply curve within market structures

answer

- There is no supply curve in any except perfect competition.

-Quantity supplied depends not only on a firm's MC but on demand and MR

question

Supplu function Perfect Competition

answer

MC Curve above AVC curve.

question

HHI M&A

answer

Sum of the market shares before and after the merger. Maintaining same amount of firms constant.

-Sensitive to mergers with two large market share firms

question

n-firm concentration ratio

answer

- Simple to calculate

- But does not measure market power or elasticity of demand

-Barriers to entry are not considered

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Reading 9 – The Firm and Market Structures

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